Case Law Details
Citation: Rain Commodities Limited Vs Dy. Commissioner of Income Tax ITA No. 673 / Hyd / 2009, (Hyderabad Special Bench).
Court: ITAT Hyderabad (Special Bench)
Incomes exempt under the regular provisions of the ITA would be liable to tax under MAT if they are not expressly excluded under the Explanation providing permissible adjustments to be made in computing the book profit.
Facts
a) The assessee, Rain Commodities Ltd., an Indian Company, had during the assessment year 2004-05 transferred certain assets to its wholly owned subsidiary in India and had credited the profits arising on transfer of the assets to the Profit & Loss account (P&L a/c). The capital gains on the transfer were not offered for tax while computing the total income under the normal provisions of the ITA, in view of the specific exemption for such transfers under section 47(iv) of the Income-tax Act, 1961 (ITA).
The profits were also excluded while computing the „book profit? under section 115JB of the ITA.
b) A regular assessment was made by the assessing officer (AO) accepting the contentions of the assessee. Subsequently, the Commissioner of income tax (“CIT”) initiated proceedings for revising the assessment under section 263 of the ITA and directed the AO to re-compute the book profit under section 1 15JB after including the gains on transfer of the assets to its subsidiary.
c) An appeal was preferred before the Income Tax Appellate Tribunal (“ITAT”) against the order of the CIT. In view of conflicting rulings on the subject, the matter was referred to a Special Bench.
Issue before the Special Bench
Whether the gains arising on account of transfer of assets to the wholly owned subsidiary should be considered for computing the book profits under section 11 5JB of the ITA without considering the regular provisions of the ITA?
Contentions of the Taxpayer
a) The intention under section 11 5JB is to tax business profits only and not profits from realization of any asset.
b) Profits derived from the transfer of assets to its subsidiary could not be a part of the P&L a/c under the provisions of Parts II and III of Schedule VI to the Companies Act,1956 (Cos. Act) since it is realized on capital assets.
c) As per sub-section (5) of section 11 5JB, the book profit has to be computed after taking into consideration the other provisions of the ITA. Therefore, income that is exempt under the other provisions of the ITA would also be excluded for computing the book profit.
Contentions of the Revenue
a) Section 11 5JB governing tax on book profits, commonly referred to as „Minimum Alternate Tax? (MAT), is an alternate method of taxation.
b) The intention under MAT is to tax book profits, irrespective of its nature or component and without granting privileges of deductions and exemptions available under the regular provisions of the ITA, except as provided under section 1 15JB.
c) As held by the Supreme Court in Apollo Tyres Ltd. v. CIT1 and in CIT v. HCL Comnet Systems and Services Ltd. 2 the AO cannot go beyond the net profit as shown in the P&L a/c which is prepared in accordance with Parts II & III of Schedule VI of the Cos. Act except for the adjustments permissible under Explanation 1 to section 115JB.
d) The capital gains are a part of the net profit as per the P&L a/c. Since there is no specific exemption available under Explanation 1 for excluding the gains, the question of claiming a deduction of such exempt income does not arise.
e) If the argument that exempt income is to be excluded from book profits is to be taken to its logical end, then all the provisions of the ITA ought to be applied in computing the book profits. Such an interpretation would render the non obstante clause under sub-section (1) of section 11 5JB, ineffective and superfluous.
Observations and Ruling of the Special bench of the Hyderabad Tribunal
a) The AO has the power to alter the book profits in the following cases:
· If it is discovered that the P&L a/c is not drawn up in accordance with Parts II and III of Schedule VI to the Cos. Act. However, this should not be based on a mere difference of opinion.
· If accounting policies / standards are not adopted for preparing accounts and the method, rate of depreciation has been incorrectly adopted for preparation of accounts laid before the Annual General Meeting.
b) The moot question is whether Parts II and III of Schedule VI permit exclusion of capital gains from the P&L a/c. The assessee had itself credited the capital gains to the P&L a/c. Even under clause 3(xii) of Part II of Schedule VI, the profits or losses in respect of transactions of an exceptional or non-recurring nature are to be disclosed. This clearly shows that capital gains should be included for the purposes of computing the book profit.
c) There was no qualification by the auditors that the accounts of the company were not in accordance with accounting policies or standards.
d) Sub-section (5) of section 11 5JB merely clarifies that all other provisions of the ITA shall apply. But this is subject to the provisions otherwise contained under section 115JB, which have an overriding effect. Importing exemptions and deductions allowed under the normal provisions of the ITA, for the purposes of computation of the book profit will negate the very purpose for which the MAT provisions were introduced.
e) Therefore, in the absence of any provisions under Explanation 1 to section 11 5JB for the exclusion of exempted capital gains, the assessee is not entitled to such exclusion while computing the book profits.
Key takeaways
Incomes exempt under the regular provisions of the ITA would be liable to tax under MAT if they are not expressly excluded under the Explanation providing permissible adjustments to be made in computing the book profit.
